Wall Street Reinvents Itself

The securities industry turns to the corporate bond market to save itself, as investment banking business wanes.

Faced with the threat of another bruising year, Wall Street has turned to the booming corporate bond market to bail itself out. And it appears to be working -- at least for now.

Revenue from bond underwriting and fixed-income trading desks fueled a first-quarter earnings surge at many Wall Street securities firms, and similar results are expected from the brokers in the second quarter. Also, when you factor in all the dollars that Wall Street firms are saving after eliminating 83,000 jobs in the past three years, it's proving to be a recipe for success that investors appreciate.

This year the Amex Securities Broker/Dealer Index is up 26%, far outpacing the 11% gain in the S&P 500.

But some analysts caution there are signs that the bond business could run out of steam in the second half of the year. And that could put a crimp in Wall Street earnings in the third and fourth quarters, if other lines of investment-banking work don't start to rebound soon. The market for new equity offerings remains ice cold, and no one seems ready yet to pull the trigger on a big corporate merger.

In fact, May was one of the worst months for corporate deal-making in more than a decade. Prudential Securities bank analyst Michael Mayo described merger-and-acquisition activity as "still abnormally low" in a recent report, meaning there's very little investment-banking business for Wall Street firms. Meanwhile, the downsizing on Wall Street continues as firms keep shedding investment bankers and stock analysts.

But for now, it's smooth sailing on Wall Street on the earnings front, as low interest rates drive investors away from low-yielding U.S. Treasuries and toward corporate bonds that pay higher returns. So while corporations may find it difficult to raise money by selling stock, they are finding a ready market for high-yield junk bonds, or hybrid securities like convertibles -- bonds that convert into stock at predetermined prices.

Junk Bonds Jump

Indeed, this year the biggest gains have been in the junk bond market, where Wall Street firms have underwritten 181 debt offerings for a total dollar value of $49.7 billion, according to Thomson Financial. By comparison, at this time last year, the Street had pumped out 138 junk bond deals with a total value of $32.4 billion.

The convertible bond market also has been active, with 103 deals coming to market for a total dollar value of $41 billion, according to Morgan Stanley's Convertbond.com tracking service. A year ago, there were 77 deals that raised $39 billion.

May was a particularly active month, with 48 convertible bond deals coming to market, as companies rush to get their financing in place before the summer doldrums set in. On Wall Street, May and June traditionally are two of the busiest months for investment bankers, as companies look to get new offerings and deals done before everyone heads for the beach.

"When rates are this low, it's going to drive the junk bond market," said Sean Egan, president of Egan Jones Ratings, a credit rating service.